Ensuring employees' gratuity is safe

Question: Numerous companies are facing challenging times and uncertain futures. As a first-time entrepreneur, how do I manage my company's finances to ensure my employees' gratuity is safe and that they are aware of this?

Answer: In the UAE, all employees are entitled to gratuity as part of their benefits package. Under the UAE Labour Law, 21 days of an employee's salary is accrued annually.

For any entrepreneur or employer, the gratuity provision for their employees forms an essential part of their financial plan and needs to be carefully supervised.

It is good to hear that you are allocating funds and are concerned about your employees' welfare. Some companies actually have no surplus funds budgeted for their employees' gratuity payments!

Many employers do not separately identify their gratuity provision. This poses a major risk in the long term should a business start to collapse.

Some employers reinvest sums allocated for employee gratuity back into the business. This practice is fine when times are good for the business and economy. However, this may backfire if the company suffers a downturn.

An example of this is the highly publicised incident where a renowned businessman in the UK, Robert Maxwell, tapped into the pension funds set aside for the business's employees to shore up the growing debts across his media empire. Ultimately, all his employees lost their pensions when the corporation, the Mirror Group, collapsed.

While we don't have the practice of creating pensions in the Gulf, it is easy to see how employers can duplicate the same mistake Maxwell made through tapping into the funds allocated for employees' gratuity.

Some employers invest in stocks, funds or unrelated industries - in the UAE for example, employers will have invested in real estate. Again, this practice can bode well during a bull market, however during an economic downturn it can freeze a lot of the company's finances.

Some investments in the current climate are now illiquid and falling in value. Should your business not have funds to weather the current climate, you not only lose the amounts you have invested in if you sell low, you cannot change your asset into liquid cash as a lifeline for the company.

In both scenarios, your employees lose their gratuity because of ill-advised financial planning.

A sensible course of action to take in both a bull and bear market is to invest in a balanced portfolio of equities and bonds targeting moderate growth with managed risk. This style of investment reduces the amount you risk to lose during changes in the economy and will, in the long run, outperform cash returns.

If you are unsure how to spread your investments using the gratuity budget, put the money into a trust - offshore (Isle of Man) or onshore (DIFC) where the cash is outside your access and your directors' reach. This way, your company's fund is managed by experts and distances you from the temptation of using the funds as a cash reserve or additional capital.

Speak to a financial adviseor to see what your best options are, especially if you are not sure how to spread your investments or to find an offshore trust.

- The writer is Director of General Insurance at Nexus, one of the region's leading financial advisers.

The opinion expressed here are the writer's own and do not necessarily reflect the views of Gulf News. If you have any questions, please e-mail: advice@gulfnews.com